presentation on price volatility, given at the symposium on Market Instability organised by the Ulysses proejct, July 2015 Milan,

1. Why volatility can be useful and
uncertainty needs more attention
Krijn Poppe l senior economist and research manager
LEI Wageningen UR
Seminar Market Instability, Ulysses project, Milan 2015

2. 2

3. 3
0.00
5.00
10.00
15.00
20.00
25.00
30.00

4. 4
• 1960s policy debate: should we have a CAP for ware and
seed potatoes ?
• Favoured by France, fiercely opposed by The Netherlands
• Starch potatoes: high volatility in yields (sandy soils), fixed
(wheat-based) price: volatile incomes
• Ware and seed potatoes: high volatility in yields (but
irrigation easier), very volatile prices, very volatile incomes,
but at a higher level.

5. Gerlich’s hog cycle: 1911 - 2011
(c) Parker & Shonkwiler – ERAE 41 (1) 2014
5

6. In praise for price volatility
 In saturated markets with yield increases, production
areas have to decline
 Technical change that increases labour productivity (to
raise incomes) means that areas have to concentrate on
larger farms
 In a year / period with low prices farms quit the sector –
and have a socially acceptable excuse to do so
 Years with high prices (due to weather that reduces
yields with inelastic demand) provide the 20% best
farms with a financial buffer to
● innovate: buy the new and bigger machinery
● enlarge: buy the land of the neighbour
6

7. Volatility of output vs. farm income in the EU
EU Project Income Stabilisation

8. income higher
than opportunity
costs
1%
income still
positive
17%
delay redemption
22%
financial distress
30%
before shock
negative income
30%
Simulated income crises (arable)
income higher
than opportunity
costs
13%
income still
positive
77%
delay redemption
4%
before shock
negative income
3%financial distress
3%
Spain Netherlands
income higher
than opportunity
costs
1%
income still
positive
30%
delay redemption
37%
financial distress
17%
before shock
negative income
15%
income higher
than opportunity
costs
6%
income still
positive
31%
delay redemption
23%
before shock
negative income
24%
financial distress
16%
Germany
Hungary

9. Is there a policy issue to be researched ?
 Price and output volatility are easier to measure, but
income stability is the political issue
 Farmers have many tools to cope with instability:
● Cropping plan and technical decisions
● Insurance (technology helps)
● Future markets
● Contracts
● Pooling of sales in a cooperative or with a merchant
● Level of borrowing (solvency)
● Tax smoothing
 Should we address policy makers to take action if we
conclude on price, yield or income volatility ??
9

10. 10
About 40% of growers have
financial stress, lack of cash flow
Financial stress in Dutch glasshouse horticulture

11. 11
Farm Income per FTE, Glasshouse horticulture – NL
Vegetables

12. Loans exploded and are now redeemed
(index long term loans / m2 glass, 2001/05=100)
12
Source: LEI FADN

13. OECD Trade & Agriculture 13
Catastrophic Risks
Rare, high damage &
systemic
Marketable Risks
Middle range
Normal Risks
Small damage but
frequent
On farm
strategies
Market tools
Ex-ante
Policies
Ex-post
Policies
Good policy response: Risk layering
Probability
Higher income loss
On-farm strategy
- Diversification
- Saving
Market tools
- Forward contract
- Private insurance
Disaster Assistance
Policies
- Ex-ante/ Ex-post
payment
- Subsidized insurance
Moregovernment
involvement?

14. Uncertainties matter more than risks
(c) The Economist; source Munich-Re 14

15. Provocative statements for the discussion
 Farmers: trade off between risk and return (CAPM)
 It is hard in CAP to reduce their risk without their returns
 Volatility has positive effects at sector level as it
supports sector dynamics: innovation and scaling up
 Farmers have many tools to manage risks and if not,
governments could help to install market based solutions
 Researchers that study such risks should refrain from
policy advise but address farm management
 Given climate change and plant and animal diseases,
researchers (and CAP) should concentrate on resilience
to catastrophic risks, uncertainties, black swans...
 How to provide a (social) safety net to farmers: CAP or
normal social policy ?
15

16. Thanks for your
attention
krijn.poppe@wur.nl
wageningenUR.nl/lei
EAAE Seminar December 1 Brussels:
Does Europe need a Food Policy?